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As the leader of a consultancy, you’ll likely be running your firm with the idea of optimizing shareholder value and your exit prospects in mind.
Alex Thomson, Partner for Growth Capital Partners, a private equity investor, and Jerome Glynn-Smith, MD for Equiteq, a specialized M&A advisor to the consulting industry, discuss how you can get your firm “exit ready”—and what to do if you’ve got gaps.
For Jerome, “preparation and readiness” are key when taking your business to market. Entering the market without the right level of preparation can be quite harmful to businesses as they risk either having no deal happen at all or a valuation drag, which then makes it difficult to go back to market in the short term.
Thankfully, he’s identified the 6 key components that encompass the “perfect prep”:
“You need to be able to both understand and articulate why you’re doing something, and ask if everyone is aligned to do it.”
Essentially, this component can be distilled into ensuring you and your core team demonstrate genuine collective agreement on the objectives of the business. What makes you tick, what drives you—a solid, coherent vision.
Owner-managed consultancies are usually founder-centric, but Jerome believes it’s important to position a management team as people who will be part of the equity and leading the business.
It’s not that you can’t have gaps, but you should acknowledge where they are. Jerome continues, “maybe there isn’t a fully-fledged CFO in the business, well, a private equity solution might actually help you fill that gap.”
Part of the value that a private equity relationship can bring is from the investors’ network—they’re often able to supplement your management team people they’ve previously worked with.
If there’s a particular gap in your management team, don’t be afraid to identify it as your PE partner may potentially have contacts who are suitable for the role.
Alex adds: “The team might not be ticking every box at the point of the deal, but that doesn’t prevent the investment from happening, or us seeing the opportunity to take the team further”.
Another key element to consider is whether the business has been invested in from a shared services perspective for growth, or if it will be seen as a project-centric business with insufficient investments.
Project-centric businesses sometimes show abnormal levels of profitability because they invest more in delivering and invoicing projects rather than the infrastructure. “That’s a key element to think through and get right.”
People buy the future when they invest in a business, not the past. They get conviction of the future based on the past and present.
Knowing where you want to go as a business in terms of where your growth comes from is crucial. Does it come from new clients, or doing more with the same ones? If it’s the same clients, how will expansion take place? If it’s new clients, how will they be won?
“Being able to articulate that and have it thought through is something that’s particularly valuable.”
When getting through a transaction, some of the early stages of due diligence are about financial and HR numbers verification—and then ensuring harmony across teams. Having a good handle on that enables the right storytelling around growth and profitability.
“Not all businesses have invested in data and systems, but solutions like CMap are a crucial opportunity to demonstrate credibility.”
To get through due diligence, you must first think through the risks that come with a change in ownership. When someone purchases your shares as a founder, they also inherit the company’s liabilities.
There may be actions you’ve performed as a manager that might be viewed as a risk to the company—from legal risk to tax risk—because you’re running your firm as a “day to day” business, focusing on clients and delivering projects.
Identifying those risks ahead of the curve prevents you from discovering them during the negotiation and ultimately being left on the backfoot.
If a firm still isn’t quite exit ready, investors are able to offer alternative solutions e.g. offering insight and support from experts that will enable the business to get to a state of investment readiness.
“If today’s not the right time for us, in 12 months it might be,” says Alex. “In the meantime, we’re happy to support the firm in any way we can to get there quicker.”
In the preparation phase, it may be the case that certain gaps are identified. Being able to be open about what those gaps are is often the best way forward as it’s seen as a proposition for investment that’s both more genuine and has more equity value.
When you’re investing in a business, you’re thinking about the contribution that you can make to its value proposition and people (and ultimately adding some equity value). “Those gaps can be seen as a positive element of the investment proposition.”
Jerome predicts that 2023 will be a much different M&A environment than the likes of 2021 and 2022 in terms of market sentiment, dynamics and pricing—and only the consultancies that are well-prepared will succeed.
To hear more from the discussion, watch the full webinar here.
Learn more about Equiteq and Growth Capital Partners.